Business Context and Reporting Period
This Form 8-K filing by Morningstar, Inc. is dated November 4, 2016. The report serves as a Regulation FD disclosure containing responses to investor questions regarding the company's strategic direction, financial metrics, and recent corporate actions. The filing addresses operational updates through the first nine months of 2016 and outlines future capital allocation strategies.
Key Financial Metrics and Operational Data
- Capital Expenditures: $47.5 million for the first nine months of 2016, compared to $39.9 million in the same period of 2015. This represents 8.1% of revenues for the period.
- Operating Margin: The filing notes a decrease in operating margin for 2016 due to increased investments and lower revenue growth rates in transaction-based businesses. No specific margin percentage is provided for the current period.
- Peer Comparison: The average operating margin for Morningstar's peer group (including FactSet, Moody's, and S&P Global) was 24.6% for the trailing 12-month period through September 30.
- Debt and Liquidity: Morningstar plans to increase its revolving credit facility principal to $300.0 million and extend the term to three years to fund the PitchBook acquisition.
- Headcount: Total employee count increased by approximately 10% over the past 12 months, including roughly 150 new technology roles.
Material Changes and Strategic Developments
- PitchBook Acquisition: Morningstar acquired PitchBook, a provider of private market data. The acquisition is expected to be funded primarily through borrowings under the expanded credit facility.
- NRSRO Registration Expansion: The SEC authorized Morningstar Credit Ratings to expand its registration as a Nationally Recognized Statistical Rating Organization (NRSRO) to include corporate issuers and financial institutions, in addition to its previous focus on asset-backed securities.
- Investment Focus: Significant resources are being directed toward five areas: Workplace Solutions/Retirement, Morningstar Direct, Morningstar Managed Portfolios, Morningstar Credit Ratings, and Morningstar Indexes.
Guidance, Outlook, and Management Commentary
- Margin Outlook: Management does not have a specific target operating margin. Margins are expected to vary based on investment levels, with the long-term expectation to align with peer averages.
- PitchBook Profitability: While specific targets are not disclosed, management believes PitchBook can generate operating profits relatively soon if it sustains high revenue growth. PitchBook's client count has tripled to over 1,800 in three years.
- Share Repurchases: The company evaluates repurchases based on valuation thresholds. While the PitchBook acquisition may limit the volume of repurchases due to debt repayment obligations, it does not preclude them entirely.
- Capital Expenditure Outlook: Morningstar expects to maintain capital expenditures at a similar dollar level in 2017 to support network hardware, software platform rebuilding, and global office expansion.
- Risks: Key risks include fiduciary liability, brand protection, technological disruption, regulatory compliance, market volatility affecting asset-based fees, and operational challenges in offshore facilities.
Investor Verification Checklist
- Verify the specific terms and interest rates of the expanded $300 million revolving credit facility.
- Monitor the integration progress and revenue contribution of the PitchBook acquisition in upcoming quarterly reports.
- Track the actual operating margin trajectory to assess if it converges with the 24.6% peer average as management anticipates.
- Review the volume of corporate debt ratings issued by Morningstar Credit Ratings following the NRSRO expansion.
- Confirm the timeline for PitchBook achieving operating profitability as suggested by management.